The United Nations Commission on International Trade Law has an opportunity this week to keep pace with the other developments around the world challenging ISDS by using bold and creative thinking. Such innovation is not beyond UNCITRAL’s mandate, argues Rob Howse.

Nothing unites critics of globalization these days more than their hostility to investor-state dispute settlement.

Arbitration under the International Centre for the Settlement of Investment Disputes or the United Nations Commission on International Trade Law (UNCITRAL) allows an investor to sue a host state before an ad hoc arbitral tribunal for violations of bilateral investment treaties or trade and investment agreements such as the North American Free Trade Agreement. If successful, the investor can enforce a monetary award against the host state in ordinary courts around the world.

This system has been characterized as a network of secret or ‘shadow’ courts dominated by a clique of elite arbitrators motivated not by justice, but by personal wealth acquisition, and often with conflicts of interest.

This is a system where multinational corporations unleash blue-chip law firms on some of the world’s poorest countries, chilling regulation in the public interest, forcing multimillion-dollar settlements or winning awards that are even larger, sometimes exceeding an impoverished nation’s entire annual budget for health, education and public security.

In New York this week, delegates at UNCITRAL will consider how to fix the system. The EU and Canada think that there is a “fundamental and widespread lack of trust” in the system, to use European trade chief Cecilia Malmström’s words.

The distrust stems from the arbitral process and how it operates – such as conflicts of interest, lack of legal certainty and arbitration’s domination by a commercial law, not a public interest, perspective. Brussels and Ottawa have already put a -bilateral – investment court in their trade agreement, CETA, replacing traditional arbitration.

With the EU and Canada taking the lead, the delegates at UNCITRAL will deal with issues such as lack of arbitrator impartiality and independence and the need for a meaningful accountability mechanism such as appellate review.

The enormous costs of the system, driven by for-profit judges by the hour and top-billing rate corporate law firms, will also be in play.

Also on the table will be how to produce greater legal certainty and consistency, while the current system of ad hoc arbitrator decision-making entails no respect for precedent; in different disputes, different arbitrators come out in contradictory ways on the very same legal points.

‘Trappings of a legal system’

George Kahale III, a senior US lawyer, said of ISDS: “One can detect the trappings of a legal system. That’s all they are, trappings.” And many critics of ISDS question whether replacing the trappings of a legal system with a global court will do the trick.

After all, it is the operational clauses in treaties on investment, not the process itself, that generate claims that legitimate regulation is a ‘taking’ because of how it affects an investor’s profits, or that the investor’s “expectations” have been undermined by a change in government policy that harms its revenue -however important it may be for the national interest. Such clauses have been tightened in several recent treaties including CETA and the TPP11. But they remain.

The UNCITRAL reform discussions, focused on procedure, will do little to change this.

But there have been other dramatic developments around the world. South Africa has replaced international investment protection, including ISDS, with a domestic legal framework for investment. India has adopted a model for an investment treaty that is a radical departure from earlier agreements, affording many exceptions and safeguards for domestic political sovereignty and imposing a five-year period for domestic legal challenge before an investor can go before international arbitration.

Perhaps the largest shock has come from Washington, where leading officials of the Trump administration, strange bedfellows indeed, have joined the strongest critics of the system. United States Trade Representative Robert Lighthizer recently noted: “We’ve had situations where real regulation which should be in place which is bipartisan, in everybody’s interest, has not been put in place because of fears of ISDS.”

Potential for progress

For some critics, the UNCITRAL discussions talks are too little, too late.

Even supporters of the process admit that progress will be slow and painful, given the different views of states. At the same time, we shouldn’t understate the range of problems that could be addressed through properly defining at UNCITRAL the jurisdiction of a new permanent tribunal for deciding investment disputes. Here are some examples.

First, a blueprint for a permanent investment tribunal should state clearly that the tribunal does not have the jurisdiction, or competence, to impose international liability on a state for legitimately exercising its police powers for a public purpose. That is likely to more effectively block attacks on bona fide government policies than tinkering with the semantics of general treaty clauses on takings or “fair and equitable treatment”.

ISDS arbitrators have invented jurisdiction-expanding devices to hear cases outside the treaty. Contrary to how it has been read in many decades of case law in the WTO and its predecessor, the GATT, arbitrators have used the most-favoured nation clause to allow investors more beneficial procedures under treaties between the defendant state and a third country – of which the investor isn’t even a national!

Arbitrators have used what is typically vague, aspirational language in treaties saying that states must honor all their commitments to take jurisdiction over disputes where the investor and defending state had agreed by contract to an entirely different dispute system, usually the domestic courts. Quite a few of the most criticized rulings in ISDS have been generated by these outrageous over-readings.

Again, at UNCITRAL, it is easily possible to devise language that would exclude tribunal competence to apply investment treaties to which the investor’s home state is not party; and equally to bar any claim where there is a contractual agreement to a different dispute forum.

Tribunal’s remedial powers should be curbed

Another major issue with the system is grossly inflated damages claims, assisted by arbitrators’ lack of knowledge about principles of accounting and finance in most instances, and ready availability of high-priced consultants and ‘experts’ willing to do creative work with numbers and come up with figures in the billions.

States could agree at UNCITRAL to cap the remedial powers of a multilateral tribunal, either with a monetary limit or, for instance, to prohibit the tribunal from awarding, other than in exceptional circumstances, an amount exceeding investor’s proven losses or costs.

Most arbitrators, by contrast, have borrowed a doctrine of full reparation from older international law, which was concerned with state-to-state disputes and repairing the dignity and equality of a sovereign state after the wrongful act of another sovereign.

This notion of full compensation, including for earnings that the investor might have made into the infinite future, produces enormous moral hazard – basically guaranteed profits regardless of the investor’s behavior – and is understandably questioned by economists.

Finally, as a matter of international justice, other stakeholders should also have access to justice in disputes about investment – indigenous groups, communities affected by environmental problems, which often trigger investment claims, and so on. A tribunal that gives standing to such groups, and which is charged with applying not only investment law, but international law of human rights and environmental protection, would give NGOs that now largely dismiss the UNCITRAL process, an important stake in it.

If UNCITRAL is to keep pace with the other developments around the world challenging ISDS, then bold and creative thinking will be necessary. Such innovation is not by any means beyond UNCITRAL’s mandate.

Rob Howse (@howserob) is a professor of international law at New York University. This article draws from his recent essay in the Yearbook of European Law 2017.

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